Economics

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What Is Economics?
Economics is a social science
concerned with the production, distribution, and
consumption of goods and services.
It studies how individuals, businesses,

governments, and nations make choices about
how to allocate resources.
Economics focuses on the actions of human

beings, based on assumptions that humans act
with rational behavior, seeking the most optimal
level of benefit or utility.
The building blocks of economics are the studies

of labor and trade.
Since there are many possible applications of human labor and many different ways to acquire resources, it is
the task of economics to determine which methods yield the best results.
Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the
economy as a whole, and microeconomics, which focuses on individual people and businesses.
❖ Adam Smith was an 18th-century Scottish economist, philosopher, and author, and is considered
the father of modern economics. Smith is most famous for his 1776 book, "The Wealth of Nations."
Economic System
Economic System refers to the manner in which individuals and institutions are connected together to carry
out economic activities in a particular area.
Economic systems manage elements of production, combining wealth, labour, physical resources, and
business people.
An economic system incorporates many companies, agencies, objects, models, and deciding procedures.
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Types of Economic Systems
Capitalist economy - Capitalism is an economic system in which private individuals or businesses own capital
goods.
In a capitalist system, the products manufactured are divided among people, not according to what they want
but on the basis of purchasing power, which is the ability to buy products and services.
The low-cost housing for the underprivileged is much required but will not include demand in the market
because the needy do not have the buying power to back the demand.
Therefore, the commodities will not be manufactured and provided as per market forces.
Socialist economy - A socialist economy is a system of production where goods and services are produced
directly for use, in contrast to a capitalist economic system, where goods and services are produced to
generate profit (and therefore indirectly for use).
"Production under socialism would be directly and solely for use.
It is believed that the government understands what is appropriate for the citizens of the country. Therefore,
the passions of individual buyers are not given much attention.
Mixed economy - A mixed economic system is a system that combines aspects of both capitalism and
socialism. A mixed economic system protects private property and allows a level of economic freedom in the
use of capital, but also allows for governments to interfere in economic activities in order to achieve social
aims.
Classification of Indian Economy
They are three sectors in the Indian economy, they are; primary economy, secondary economy, and tertiary
economy.
Primary Sector
➢ The primary sector in India is the sector which is largely dependant on the availability of natural
resources in order to manufacture the goods and also to execute various processes.

➢ The services in this sector are entirely dependant on the availability of the natural resources in order
to keep the day-to-day operations running.
➢ As we have the clear idea of this sector is, the best example to discuss in this sector is the agriculture
sector.
➢ The other examples in this sector include fishing and forestry, but agriculture accounts for the largest
in this sector.
➢ Sector share towards GDP - 17.32%

➢ Sector share by working force – 53%
Secondary Sector
➢ Manufacturing and Industry sector known as the secondary sector , sometimes as the
production sector.
➢ The secondary sector includes secondary processing of raw materials, food manufacturing, textile
manufacturing and industry. Most of this sector is mechanical engineering.
➢ The secondary sector forms a substantial part of GDP, it creates values (goods) and it is the engine of
economic growth and is crucial for all developed economies, although the trend, in most developed
countries, is the predominant tertiary sector.

Tertiary Sector
➢ This sector contributes the largest in terms of share in GDP in India.
➢ The sector is also the service sector and is important when you consider the development of the other
two sectors. Like the previous sector, this sector also adds the value to the products.
➢ The example of this sector is all service sectors which IT services, consulting, etc.
➢ The main problem that this sector is that the jobs which involve lower salaries do not attract much
employment.

➢ And this remains the future dilemma as India is looking for double-digit growth in the near future.

BRANCHES OF ECONOMICS:
1. Microeconomics - is a branch of economics that studies the behavior of individuals and firms in
making decisions regarding the allocation of scarce resources and the interactions among these
individuals and firms.
2. Macroeconomics - is a branch of economics dealing with the performance, structure, behavior,
and decision-making of an economy as a whole. This includes regional, national, and global
economies.
MICRO-ECONOMICS
1.DEMAND
Meaning of demand - Quantity of the commodity that a consumer is able and willing to purchase in a given
period and at a given price.
Demand Schedule- It is a tabular representation which shows the relationship between price of the
commodity and quantity purchased.
Demand Curve- It is a graphical representation of demand schedule.
Individual Demand- Demand by an individual consumer.

Factors Affecting Individual Demand for a Commodity/ Determinants of Demand: -
1. Price of the commodity itself
2. Income of the consumer
3. Price of related goods
4. Taste and Preference
5. Expectations of future price change
Demand Function: Dx = f( Px, Y, Pr, T)
Law of Demand- Other things remains constant, demand of a good falls with rise in price and vice versa.
Changes in Demand- They are of two types -

1) Change in Quantity Demanded (Movement along the same demand curve)
2) Change in Demand (Shifts in demand)
Change in Quantity Demanded- Demand changes due to change in price of the commodity alone, other
factors remain constant; they are of two types –
1) Expansion of demand: More demand at a lower price
2) Contraction of demand: Less demand at a higher price
Causes of Increase in Demand

1. Increase in Income.
2. Increase/ favorable change in taste and preference.
3. Rise in price of substitute good.
4. Fall in price of complementary good.

Note: Increase in income causes increase in demand for normal good.
Causes of Decrease in Demand:

1. Decrease in Income.
2. Unfavorable/Decrease in taste and preference
3. Decrease in price of substitute good.
4. Rise in price of complementary good.
Note: Decrease in income causes Decrease in demand for normal good.
Type of Goods
1. Substitute Goods- Increase in the price of one good causes increase in demand for
other good. E.g., tea and Coffee
2. Complementary Goods- Increase in the price of one good causes decrease in demand
for other good. E.g.: - Petrol and Car
3. Normal Good- Goods which are having positive relation with income. It means when
income rises, demand for normal goods also rises.
4. Inferior Goods- Goods which are having negative relation with income. It means less
demand at higher income and vice versa.
5. Normal goods - the quantity demanded of such commodities increases as the

consumer’s income increases and decreases as the consumer’s income decreases. Such
goods are called normal goods.

6. Giffen goods - a Giffen good is an inferior good which people consume more of as price
rises, violating the law of demand.. In the Giffen good situation, cheaper close
substitutes are not available. Because of the lack of substitutes, the income effect
dominates, leading people to buy more of the good, even as its price rises.
Types of Demand
1. Cross demand: Demand primarily dependent upon prices of related goods is called cross demand.
The complementary goods and substitutes are called related goods.
In case of complementary goods like pen and ink demand for good is inversely related to the prices of other
goods but the case in substituting goods are just opposite.
Demand for substituting goods is directly related to prices.
2. Income demand: Demand primarily dependent upon income is called income demand.
3. Direct demand: Demand for goods and services made by final consumers to satisfy them
wants or needs is called direct demand. For example, guest of hotels makes the demand for
food.
4. Derived demand: Demand for goods and services made according to direct demand is called derived
demand.
5. Joint demand: Demand made for two or more goods and services to satisfy single need or
want is called joint demand.
6. Composite demand: Demand for a single commodity made in order to use for different

purposes is called composite demand.
Price Elasticity of Demand: Refers to the degree of responsiveness of quantity demanded to change
in its price.
1. Perfectly Inelastic Demand (e = 0)
This describes a situation in which demand shows no response to a change in price. In other words, whatever
be the price the quantity demanded remains the same.
2. Inelastic (less elastic) demand (e < 1)

In this case the proportionate change in demand is smaller than in price.
3.Unitary elasticity demand (e = 1)

When the percentage change in price produces equivalent percentage change in demand, we have a case of
unit elasticity. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity
4. Elastic (more elastic) demand (e > 1)

In case of certain commodities, the demand is relatively more responsive to the change in price.
It means a small change in price induces a significant change in, demand.
5. Perfectly elastic demand (e = ∞)

This is experienced when the demand is extremely sensitive to the changes in price. In this case an
insignificant change in price produces tremendous change in demand. The demand curve showing perfectly
elastic demand is a horizontal straight line.

Cross-elasticity of demand
The responsiveness of demand to changes in prices of related goods is called cross-elasticity of demand
(related goods may be substitutesor complementary goods). In other words, it is the responsiveness
ofdemand for commodity x to the change in the price of commodity y.
ec = Percentage change in the quantity demanded of commodity X/Percentage change in the price of
commodity y
Measures of cross-elasticity of demand -
Infinity - Commodity x is nearly a perfect substitute for commodity y
Zero - Commodities x and y are not related.
Negative - Commodities x and y are complementary
LAW OF SUPPLY
Supply means the goods offered for sale at a price during a specific period of time. It is the capacity and
intention of the producers to produce goods and services for sale at a specific price. The supply of a
commodity at a given price may be defined as the amount of it which is actually offered for sale per unit of
time at that price.
The law of supply establishes a direct relationship between price and supply. Firms will supply less at lower
prices and more at higher prices. “Other things remaining the same, as the price of commodity rises, its supply
expands and as the price falls, its supply contracts”.
Elasticity of Supply
The law of supply tells us that quantity supplied will respond to a change in price. The concept of elasticity of
supply explains the rate ofchange in supply as a result of change in price. It is measured by the formula
mentioned below –
*Elasticity of supply = Proportionate change in quantity supplied/Proportionate change in price.

FORMS OF MARKET AND PRICE DETERMINATION
Market: Market is a place in which buyers and sellers come into contact for the purchase and sale of goods
and services.
Market structure: refers to number of firms operating in an industry, nature of competition between them
and the nature of product
Types of market –
1. Perfect competition: refers to a market situation in which there are large number of buyers and sellers.
Firms sell homogeneous products at a uniform price.
2. Monopoly market: Monopoly is a market situation dominated by a single seller who has full control over
the price.
3. Monopolistic competition: It refers to a market situation in which there are many firms who sell closely
related but differentiated products.
4. Oligopoly: is a market structure in which there are few large sellers of a commodity and large number of
buyers.
Features of perfect competition:

1. Very large number of buyers and sellers.
2. Homogeneous product.
3. Free entry and exit of firms.
4. Perfect knowledge.
5. Firm is a price taker and industry is price maker.
6. Perfectly elastic demand curve (AR=MR)
7. Perfect mobility of factors of production.
8. Absence of transportation cost.
9. Absence of selling cost.

Features of monopoly:
1. Single seller of a commodity.
2. Absence of close substitute of the product.
3. Difficulty of entry of a new firm.
4. Negatively sloped demand curve(AR>MR)
5. Full control over price.
6. Price discrimination exists
7. Existence of abnormal profit.
Features of monopolistic competition

1. Large number of buyers and sellers but less than perfect competition.
2. Product differentiation.
3. Freedom of entry and exit.
4. Selling cost
5. Lack of perfect knowledge
6. High transportation cost
7. Partial control over price
Features of Oligopoly
1. Few dominant firms who are large in size
2. Mutual interdependence.
3. Barrier to entry.
4. Homogeneous or differentiated product.

5. Price rigidity.
Features of pure competition
1. Large number of buyers and sellers.
2. Homogeneous products.
3. Free entry and exit of firm
PRODUCTION
Production: Combining inputs in order to get the output is production.
Production Function: It is the functional relationship between inputs and output in a given state of
technology.
Fixed Factor: The factor whose quantity remains fixed with the level of output
Variable Factor: Those inputs which change with the level of output.
PRODUCTION FUNCTION AND TIME PERIOD

1. Production function is a long period production function if all the inputs are varied.
2. Production function is a short period production function if few variable factors are
combined with few fixed factors.
Concepts of Product:
Total Product- Total quantity of goods produced by a firm / industry during a given period of time with
given number of inputs.
Average product - Average product is also known as average physical product.
Marginal product - In addition to the total product, when one more unit of variable factor is employed,
it is called Marginal product.

Relation between MP and TP
As long as MP increases, TP increases at an increasing rate.
• When MP decreases, TP increases diminishing rate.
• When MP is Zero, TP is maximum.
• When MP is negative, TP starts decreasing.
MACRO-ECONOMICS
National Income
National income comprises of four concepts of calculations- GDP, NDP, GNP, NNP.
National Income: The sum total of factor of incomes accruing to the residents of the country, both from
their activities within and outside the economic territory is the national income of the country.
National income is calculated for a particular period, normally a financial year (In India, financial year means
April 1 to March 31 of next year).
Net factor income from abroad is added to the domestic product to get the value of National Income.
National Income = C + I + G + (X – M)
Where, C = Total consumption expenditure
I = Total investment expenditure
G = Total government expenditure
X – M = Export – Import

Gross Domestic Product (GDP)
Gross domestic product is the value of all final goods and services produced within the boundary of a nation during one
year. In India one year means from 1st April to 31st March of the next year.
GDP calculation includes income of foreigners in a Country but excludes income of those people who are living outside
of that country.
GDP = Consumption + Investment + Government Spending + Net Exports
or more succinctly as
GDP = C + I + G + NX
where consumption (C) represents private-consumption expenditures by households and nonprofit

organizations, investment (I) refers to business expenditures by businesses and home purchases by
households, government spending (G) denotes expenditures on goods and services by the government, and
net exports (NX) represents a nation’s exports minus its imports.
Net Domestic Product (NDP)

NDP is calculated by deducting the depreciation of plant and Machinery from GDP.
NDP = Gross Domestic Product – Depreciation
GNP is the value of all final goods and services produced by the residents of a country in a financial year (i.e.,
1st April to 31st March of the next year in India).
While Calculating GNP, income of foreigners in a country is excluded but income of people who are living
outside of that country is included. It is the GDP of a country added with its income from abroad.
GNP = GDP + X – M
Where,X = income of the people of a country who are living outside of the Country and M = income of the
foreigners in a country
India’s GNP is always lower than its GDP.
Gross National Product (GNP)

GNP measures the output of a country's residents regardless of the location of the actual underlying economic
activity.

Income from overseas investments by a country's residents counts in GNP, and foreign investment within a
country's borders does not.
This is in contrast to GDP which measures economic output and income based on the location rather than
nationality.
GNP and GDP can have different values, and a large difference between a country's GNP and GDP can suggest
a great deal of integration into the global economy.
GNP = C + I + G + X + Z
Where C is Consumption, I is investment, G is government, X is net exports, and Z is net income earned by
domestic residents from overseas investments minus net income earned by foreign residents from domestic
investments.
Net National Product (NNP)

Net National Product or National Income at Market Prices is the net market monetary value of all the final
goods and services produced in a country during a year.
Net National Product (NNP) in an economy is the GNP after deducting the loss due to depreciation
NNP = GNP – Depreciation
Reserve Bank of India
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve
Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to
Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
Osborne Smith was the first Governor of Reserve Bank of India.
RBI was Nationalised on 1 January 1949
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the
Government of India in keeping with the Reserve Bank of India Act.

Full-time : Governor and not more than four Deputy Governors
Appointed/nominated for a period of four years
Current - Governor Shri Shaktikanta Das as on May 2021.
Functions of Reserve Bank of India

1.Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability while keeping in mind the objective of growth.
2.Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
3.Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and maintenance of
foreign exchange market in India.
4.The issuer of Banking License
The Reserve Bank of India (RBI) issues licences to entities to carry on the business of banking and other
businesses in which banking companies may engage, as defined and described in Sections 5 (b) and 6 (1) (a) to
(o) of the Banking Regulation Act, 1949, respectively.
5. Bankers Bank
Reserve Bank Of India or RBI is known as the banker's bank. It is so called because it acts as a bank for
all the commercial banks in India.
RBI holds their cash reserves, lends them short -term funds and provides them the central clearing and
remittances facilities.
6. Banker to the Government
The RBI acts as banker to the government the Central as well as state governments.

As such, it transacts all banking business of the government, which involves the receipt and payment of
money on behalf of the government and carrying out of its exchange, remittance and other banking
operations.
7. Regulator of Economy
RBI formulates and implements the Monetary Policy of India to keep the economy on growth path. Monetary
Policy refers to the process employed by RBI to control availability & cost of currency and thus keeping
Inflationary & deflationary trends low and stable. RBI adopts various measures to regulate the flow of credit in
the country. The measures adopted by RBI can broadly be categorized as Quantitative & Qualitative tools.
Monetary Policy-Credit Control Measures

Bank Rate Policy - The bank rate policy signifies manipulation of the rate of discount by the central bank in
order to influence the credit situation in the economy.
Bank rate can be defined as the rate of interest that is charged by a central bank while lending or giving loans
to a commercial bank.
A bank can borrow money from the central bank of a country if it is insufficient in funds.
Open Market Operations- Open market operations (OMO) refers to a central bank buying or selling short-
term Treasurys and other securities in the open market in order to influence the money supply, thus
influencing short term interest rates.
Cash Reserves Ratio - Under cash reserve ratio (CRR), the commercial banks have to hold a certain minimum
amount of deposit as reserves with the central bank. The percentage of cash required to be kept in reserves
as against the bank's total deposits, is called the Cash Reserve Ratio.
Statutory Liquidity Ratio - Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities.
It is basically the reserve requirement that banks are expected to keep before offering credit to customers.
The SLR is fixed by the RBI.

Repo Rate – Repo rate refers to the rate at which commercial banks borrow money by selling their securities
to the Central bank of our country i.e Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of
funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.
Reverse Repo Rate – Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus
restricting the borrowing power of investors.
Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market.
The banks benefit out of it by receiving interest for their holdings with the central bank.
Banking in India
➢ Bank of Hindustan established in 1779 was the first bank to be established in India.
➢ First bank to be established by Indians was Awadh Commercial Bank in 1881.
➢ Punjab National Bank was the second bank to be established by Indians. It was established in 1894.
➢ First Bank established by East India Company was Presidency Bank of Bengal in 1806. Further it
established two more banks, Presidency Bank of Bombay in 1840 and Presidency Bank of Madras in
1843.
➢ In 1921 these Presidency banks were merged in Imperial Bank of India which was restructured as
State Bank of India in 1955.
➢ In 1959 Central Government took over banks from states/princely states government and associated
them with State Bank of India.
The banking sector development can be divided into three phases:
Phase I: The Early Phase which lasted from 1770 to 1969
Phase II: The Nationalization Phase which lasted from 1969 to 1991
Phase III: The Liberalization or the Banking Sector Reforms Phase which began in 1991 and continues to
flourish till date

Nationalization of Banks
The government of India under the leadership of the then Prime Minister Indira Gandhi issued an ordinance to
nationalize 14 largest commercial banks in India with effect from July 19, 1969, under the regulatory authority
of the Reserve Bank of India.
These 14 banks contained up to 85 percent of bank deposits in the country and most of them were privately
owned.
Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank,Canara Bank,
Indian Bank, Indian Overseas Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO
Bank, Bank of India are the 14 banks which were nationalised.
During 1980, 6 more commercial banks followed the suit and came under nationalized cover. Till the 1990s,
their growth grew at a snail's pace of around 4% annually.
Punjab & Sindh Bank, Andhra Bank, Oriental Bank of Commerce, Corporation Bank, Vijaya Bank and New
Bank of India.
As of May, 2021.
In the year 2019, our finance minister Nirmala Sitharaman announced the merger of ten banks into four and
this has come in effect from 1st April 2020. Now, there are 12 public sector banks
The Current List of 12 Public Sector Banks in India 2021(Government Banks) State Bank of India, Punjab
National Bank, Bank of Baroda, Bank of India, Central Bank of India, Canara Bank, Union Bank of
India, Indian Overseas Bank, Punjab and Sind Bank, Indian Bank, UCO Bank, and Bank of Maharashtra.
Banks are merged in 2021

Dena Bank and Vijaya Bank have been merged with Bank of Baroda,
Oriental Bank of Commerce and United Bank of India have been merged with Punjab National Bank (PNB),
Corporation Bank and Andhra Bank have been merged with Union Bank of India.
Non-Banking Financial Company (NBFC)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in
the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose principal business is that of

agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property.
A non-banking institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is
also a non-banking financial company (Residuary non-banking company).
Economic Planning in India
The Constitution came into force on 26 January 1950. Subsequently, Planning Commission was set up on 15
March 1950 and the plan era started from 1 April 1951 with the launching of the First Five Year Plan (1951-56)
The new government led by Narendra Modi, elected in 2014, has announced the dissolution of the Planning
Commission, and its replacement by a think tank called the NITI Aayog (an acronym for National Institution
for Transforming India).
Five Year Plans – Planning Commission

➢ The idea of economic planning for five years was taken from the Soviet Union under the socialist
influence of first Prime Minister Pt. Jawahar Lal Nehru.
➢ The first eight five year plans in India emphasised on growing the public sector with huge
investments in heavy and basic industries, but since the launch of Ninth five year plan in 1997,
attention has shifted towards making government a growth facilitator.
First Five Year Plan

It was launched for the duration of 1951 to 1956, under the leadership of Jawaharlal Nehru.
It was based on the Harrod-Domar model with a few modifications.
Its main focus was on the agricultural development of the country.
This plan was successful and achieved a growth rate of 3.6% (more than its target of 2.1%).
At the end of this plan, five IITs were set up in the country.

Second Five Year Plan
It was made for the duration of 1956 to 1961, under the leadership of Jawaharlal Nehru.
It was based on the P.C. Mahalanobis Model made in the year 1953.
Its main focus was on the industrial development of the country.
This plan lags behind its target growth rate of 4.5% and achieved a growth rate of 4.27%.
Third Five Year Plan

It was made for the duration of 1961 to 1966, under the leadership of Jawaharlal Nehru.
This plan is also called ‘Gadgil Yojna’, after the Deputy Chairman of Planning Commission D.R. Gadgil.
The main target of this plan was to make the economy independent. The stress was laid on agriculture and
the improvement in the production of wheat.
During the execution of this plan, India was engaged in two wars: (1) the Sino-India war of 1962 and (2) the
Indo-Pakistani war of 1965.
These wars exposed the weakness in our economy and shifted the focus to the defence industry, the Indian
Army, and the stabilization of the price (India witnessed inflation).
The plan was a flop due to wars and drought. The target growth was 5.6% while the achieved growth was
2.4%.
Plan Holidays
Due to the failure of the previous plan, the government announced three annual plans called Plan Holidays
from 1966 to 1969.
The main reason behind the plan holidays was the Indo-Pakistani war and the Sino-India war, leading to the
failure of the third Five Year Plan.
Fourth Five Year Plan

Its duration was from 1969 to 1974, under the leadership of Indira Gandhi.
There were two main objectives of this plan i.e. growth with stability and progressive achievement of self-
reliance.

Implementation of Family Planning Programmes was amongst major targets of the Plan
Fifth Five Year Plan

Its duration was 1974 to 1978.
The Electricity Supply Act was amended in 1975, a Twenty-point program was launched in 1975, the Minimum
Needs Programme (MNP) and the Indian National Highway System was introduced.
Rolling Plan
After the termination of the fifth Five Year Plan, the Rolling Plan came into effect from 1978 to 1990.
The plan has several advantages as the targets could be mended and projects, allocations, etc. were variable
to the country's economy. This means that if the targets can be amended each year, it would be difficult to
achieve the targets and will result in destabilization in the Indian economy.
Sixth Five Year Plan

Its duration was from 1980 to 1985, under the leadership of Indira Gandhi.
It was based on investment Yojna, infrastructural changing, and trend to the growth model.
Its growth target was 5.2% but it achieved a 5.7% growth.
Seventh Five Year Plan

Its duration was from 1985 to 1990, under the leadership of Rajiv Gandhi.
For the first time, the private sector got priority over the public sector.
Its growth target was 5.0% but it achieved 6.01%.
Annual Plans
Eighth Five Year Plan could not take place due to the volatile political situation at the centre.
Two annual programmes were formed for the year 1990-91& 1991-92.
Eighth Five Year Plan

Its duration was from 1992 to 1997, under the leadership of P.V. Narasimha Rao.
During this plan, Narasimha Rao Govt. launched the New Economic Policy of India.
This plan was successful and got an annual growth rate of 6.8% against the target of 5.6%.
Ninth Five Year Plan

Its duration was from 1997 to 2002, under the leadership of Atal Bihari Vajpayee.
The main focus of this plan was “Growth with Social Justice and Equality”.
It was launched in the 50th year of independence of India.
Tenth Five Year Plan

Its duration was from 2002 to 2007, under the leadership of Atal Bihari Vajpayee and Manmohan Singh.
This plan aimed to double the Per Capita Income of India in the next 10 years.
Its growth target was 8.0% but it achieved only 7.6%.
Eleventh Five Year Plan

Its duration was from 2007 to 2012, under the leadership of Manmohan Singh.
Its main theme was “rapid and more inclusive growth”.
It achieved a growth rate of 8% against a target of 9% growth.
Twelfth Five Year Plan

Its duration is from 2012 to 2017, under the leadership of Manmohan Singh.
Its main theme is “Faster, More Inclusive and Sustainable Growth”.
Its growth rate target was 8%

NITI Aayog
The NITI Aayog (abbreviation for National Institution for Transforming India) is a public policy think tank of
the Government of India, established with the aim to achieve sustainable development goals with
cooperative federalism by fostering the involvement of State Governments of India in the economic policy-
making process using a bottom-up approach.
It was established in 2015, by the NDA government, to replace the Planning Commission which followed a
top-down model.
The NITI Aayog council comprises all the state Chief Ministers, along with the Chief Ministers of Delhi and
Puducherry, Lieutenant Governors of all UTs, and a vice-chairman nominated by the Prime Minister.
In addition, temporary members are selected from leading universities and research institutions. These
members include a chief executive officer, four ex-official members, and two part-time members.
The Prime Minister is the Chairperson.
Chief Executive Officer (CEO): Amitabh Kant
New Economic Policy

New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao.
This policy opened the door of the India Economy for the global exposure for the first time.
In this New Economic Policy P. V. Narasimha Rao government reduced the import duties, opened reserved
sector for the private players, devalued the Indian currency to increase the export.
This is also known as the LPG Model of growth.
Liberalization, Privatization & Globalization.
Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of
India.
Manmohan Singh introduced the NEP on July 24,1991.
Main Objectives of New Economic Policy
The main objective was to plunge Indian Economy in to the arena of Globalization.
The NEP intended to bring down the rate of inflation
Increase the participation of private players in the all sectors of the economy.

That is why the reserved numbers of sectors for government were reduced. As of now this number is just 2.
It wanted to achieve economic stabilization and to convert the economy into a market economy by removing
all kinds of un-necessary restrictions.
To permit the international flow of goods, services, capital, human resources and technology, without many
restrictions.
Liberalisation
Previously private sector had to obtain license from Govt. for starting a new venture. In this policy private
sector has been freed from licensing and other restrictions.
Currently Industries licensing is necessary for following industries
Liquor , Cigarette , Defence equipment , Industrial explosives , Drugs & Hazardous chemicals.
Privatisation
Simply speaking, privatization means permitting the private sector to set up industries which were previously
reserved for the public sector. Under this policy many PSU’s were sold to private sector.
Privatization is the process of involving the private sector-in the ownership of Public Sector Units (PSU’s).
Indian Govt. started selling shares of PSU’s to public and financial institution e.g. Govt. sold shares of Maruti
Udyog Ltd.
Now the private sector will acquire ownership of these PSU’s. The share of private sector has increased from
45% to 55%.
The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means
that Govt. has been selling out these industries to private sector. Govt. has sold enterprises worth Rs. 30,000
crores to the private sector.
Globalization
Literally speaking Globalisation means to make Global or worldwide, otherwise taking into consideration the
whole world.
Broadly speaking, Globalisation means the interaction of the domestic economy with the rest of the world
with regard to foreign investment, trade, production and financial matters.

Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India economy
attractive to the global investors.
Liberal policy
All controls on foreign trade have been removed
Open competition has been encouraged.
TAX STRUCTURE IN INDIA
Taxes are the amount of money government imposes on an individual or corporates directly or indirectly so as
to generate revenue or to keep in check any black money activities in India.
The tax on incomes, customs duties, central excise and service tax are levied by the Central Government.
The state Government levies agricultural income tax (income from plantations only), Value Added Tax (VAT)/
Sales Tax, Stamp Duty, State Excise, Land Revenue, Luxury Tax and Tax On Professions.
The local bodies have the authority to levy tax on properties, octroi/entry tax and tax for utilities like water
supply, drainage etc.
DIRECT TAXES
These taxes are levied directly on the persons. These contributes major chunk of the total taxes collected in India.
Example: Income tax, Corporate tax, etc.
INDIRECT TAXES
You go to a super market to buy goods or to a restaurant to have a mouthful there at the time of billing you often see
yourself robbed by some more amount than what you enjoyed of, these extra amounts are indirect taxes, which are
collected by the intermediaries and when govt tax the income of the intermediaries this extra amount goes in to
government’s kitty, hence as the name suggests these are levied indirectly on common people.
Example: Sales Tax, Entertainment Tax, Service Tax etc.

GOODS AND SERVICE TAX (GST)
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was
passed in the Parliament on 29th March 2017.
The Act came into effect on 1st July 2017.
GST will mainly remove the Cascading effect on the sale of goods and services.
GST is also mainly technologically driven. All activities like registration, return filing, application for refund and
response to notice needs to be done online on the GST Portal.
This will speed up the processes.
Goods and services are divided into five tax slabs for collection of tax - 0%, 5%,
12%,14%,18% and 28%.
Petroleum products and alcoholic drinks are taxed separately by the individual state governments.
There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold.
In addition, a cess of 22% or other rates on top of 28% GST applies on few items like aerated
drinks, luxury cars and tobacco products.
There are 3 taxes applicable under GST: CGST, SGST & IGST.
1. CGST: Collected by the Central Government on an intra-state sale (Eg: Within Maharashtra)
2. SGST: Collected by the State Government on an intra-state sale (Eg: Within Mahaashtra)
3. IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil
Nadu)
GST COUNCIL
The Goods and Services Tax (GST) is governed by the GST Council. Article 279 (1) of the amended
Indian Constitution states that the GST Council has to be constituted by the President within 60 days
of the commencement of the Article 279A.
According to the article, GST Council will be a joint forum for the Centre and the States. It consists of the following
members:

The Union Finance Minister, will be the Chairperson
As a member, the Union Minister of State will be in charge of Revenue of Finance
The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members
Economic Survey
The Economic Survey is the flagship annual document of the finance ministry.
It reviews the economic development in India over the past financial year by giving detailed statistical data of
all the sectors-industrial, agricultural, manufacturing among others.
Besides, it analyses the whole macroeconomics of the country in the past year and provides an outline for
the next financial year.
Although the Constitution does not bind the government to present the Economic Survey, over the years, it
has become common practice for every government to present the Economic Survey before the Union
Budget.
The Economic Survey is prepared under the guidance of the Chief Economic Advisor and is presented in both
the houses of Parliament, a day before the announcement of the Union Budget.
Significance of Economic Survey

The Economic Survey holds significance as it apprises common people about the state of economic affairs of
the country and makes them aware of the key economic decisions of the government which impact their lives
in a considerable way.
The Economic Survey also recommends policy changes to the government, which are, however, not binding
but only act as a guide in framing national policies.
It contains forecasts about the economic growth of the country and the reasons outlining the projection.
A brief history of the Economy Survey

❖ The first Economic Survey was presented in the year 1950-51.
❖ Until 1964, it was presented along with the Union Budget, but later it was disjointed from the Union
Budget to give a better understanding of the budget proposals.

❖ As the Economic Survey contains a detailed analysis of the economic development of the country and
a lot of data related to various sectors of the economy, it works as a useful tool providing background
knowledge.
❖ Interestingly, former Chief Economic Advisor Arvind Subramanian in 2018 had for the first time
released the document in pink colour.
❖ The idea was to support women who suffer violence and to push for more gender equality.
❖ Not just the colour of the document, he revamped the whole document by making it more
interesting with quotes and additional information.
❖ This was the first time that the Economic Survey used data generated by GST Network and the Indian
Railways to see the flow of goods and people across states within India.
Budget
❖ A budget is an estimation of revenue and

expenses over a specified future period of time and is
utilized by governments, businesses, and individuals.
❖ A budget is basically a financial plan for a

defined period, normally a year that is known to greatly
enhance the success of any financial undertaking.
❖ Budgets can be made for a person, a group of people, a business, a government, or just about anything
else that makes and spends money.
❖ In simple words, a budget is a financial document used to project future income and expenses.

Balanced Budget
In case of a balanced budget, the estimate government expenditure shall be equal to its estimated revenue in
a financial year.
Many economists believe that a government's expenditure should not be higher than its revenue.
While this is considered to be an ideal situation by economists, attaining this can be quite a task for the ruling
dispensation.
Notably, a balanced budget does not automatically translate into financial stability in times of deflation or
economic depression due to absence of any scope for extra expenditure.
The plus point with this type of budget is that it thwarts wasteful government expenditure.
This type of budget is not considered viable for developing nations as it restricts the scope of government
spending on public welfare schemes.
Surplus Budget
In case of a surplus budget, the expected revenue surpasses the estimated expenditure in a financial year.
This implies that a government's earnings from taxes are greater than the amount spent by a government on
public welfare.
A surplus budget indicates the financial affluence of a country which means that the extra funds can be used
to pay dues, which reduces the interest payable and is helpful for the economy in the long run.
Such a budget can be considered during inflation to reduce aggregate demand.
A surplus budget is not an appropriate option for a government in cases of deflation, economic slowdown and
recession.
Deficit Budget
In case of a deficit budget, the estimate expenditure exceeds the estimated revenue of a government in a
financial year. This kind of budget is helpful in times of economic recession and also in boosting employment
rate.
In times of recession, a deficit budget is helpful in generating additional demand and bolsters economic
growth.

In order to achieve this, a government usually covers this amount via public borrowings through government
bonds or by withdrawing from its accumulated reserve surplus.
The disadvantage of this type of budget is that it can lead to excessive expenditures by the government or
debt accumulation.
Eminent economist John Maynard Keynes said once that a deficit budget is a proper way to address the
issues of under-employment and unemployment.
The government incurs the extra expenditure in order to improve the employment rate and this, in turn, helps
a surge in demand for goods and services which helps in reviving the economy at times of slowdown and
recession.
Fiscal Policy
Fiscal policy refers to the use of government spending and tax policies to influence economic conditions.
Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize
the business cycle and regulate economic output.
During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase
aggregate demand and fuel economic growth.
In the face of mounting inflation and other expansionary symptoms, a government may pursue contractionary
fiscal policy.
To help stabilize the economy, the government should run large budget deficits during economic downturns
and run budget surpluses when the economy is growing. These are known as expansionary or contractionary
fiscal policies, respectively.

.
Expansionary Policies
To illustrate how the government can use fiscal policy to affect the economy, consider an economy that's
experiencing a recession. The government might issue tax stimulus rebates to increase aggregate demand and
fuel economic growth.
The logic behind this approach is that when people pay lower taxes, they have more money to spend or
invest, which fuels higher demand.
That demand leads firms to hire more, decreasing unemployment, and to compete more fiercely for labor.
In turn, this serves to raise wages and provide consumers with more income to spend and invest. It's a
virtuous cycle, or positive feedback loop.
Rather than lowering taxes, the government may seek economic expansion through increases in spending
(without corresponding tax increases).
By building more highways, for example, it could increase employment, pushing up demand and growth.
Expansionary fiscal policy is usually characterized by deficit spending, when government expenditures exceed
receipts from taxes and other sources.

In practice, deficit spending tends to result from a combination of tax cuts and higher spending.
Contractionary Policies
In the face of mounting inflation and other expansionary symptoms, a government can pursue contractionary
fiscal policy, perhaps even to the extent of inducing a brief recession in order to restore balance to the
economic cycle.
The government does this by increasing taxes, reducing public spending, and cutting public-sector pay or jobs.
Where expansionary fiscal policy involves deficits, contractionary fiscal policy is characterized by budget
surpluses.
This policy is rarely used, however, as it is hugely unpopular politically.
Public policymakers thus face a major asymmetry in their incentives to engage in expansionary or
contractionary fiscal policy.
Instead, the preferred tool for reining in unsustainable growth is usually contractionary monetary policy, or
raising interest rates and restraining the supply of money and credit in order to rein in inflation.
Other Imp pointers on Fiscal Policy
Fiscal policy is enacted by a government. This is opposed to monetary policy, which is enacted through central
banks or another monetary authority.
The effects of any fiscal policy are not often the same for everyone.
Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle
class, which is typically the largest economic group.
In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than
the wealthier upper class.

Fiscal Policy Instruments
Taxation Policy
Through the fiscal policy, the government of a country controls the flow of tax revenues and public
expenditure to navigate the economy.
If the government receives more revenue than it spends, it runs a surplus, while if it spends more than the tax
and non-tax receipts, it runs a deficit.
To meet additional expenditures, the government needs to borrow domestically or from overseas.
Alternatively, the government may also choose to draw upon its foreign exchange reserves or print additional
money.
Public Debt
The debt contracted against the Consolidated Fund of India is defined as public debt and includes all other
funds received outside Consolidated Fund of India under Article 266 (2) of the Constitution, where the
government merely acts as a banker or custodian.
The second type of liabilities is called public account.
Sources of Public Debt - Dated government securities or G-secs , Treasury Bills or T-bills , Public Debt
definition by Union Government.
Public Expenditure
Public expenditure is spending made by the government of a country on collective needs and wants such as
pension, provisions (such as education, healthcare and housing), security, infrastructure, etc.
Sources of government revenue include taxes, and non-tax revenues

Inflation
Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food,
clothing, housing, recreation, transport, consumer staples, etc.
Inflation measures the average price change in a basket of commodities and services over time.
The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is
measured in percentage.
Effects of Inflation
The purchasing power of a currency unit decreases as the commodities and services get dearer.
This also impacts the cost of living in a country.
When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in
economic growth.
A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding
money through savings is demotivated.

As money generally loses its value over time.
Who measures Inflation in India

Inflation is measured by a central government authority, which is in charge of adopting measures to ensure
the smooth running of the economy.
In India, the Ministry of Statistics and Programme Implementation measures inflation.
How is Inflation measured

In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI
(Consumer Price Index), which measure wholesale and retail-level price changes, respectively.
The CPI calculates the difference in the price of commodities and services such as food, medical care,
education, electronics etc, which Indian consumers buy for use.
On the other hand, the goods or services sold by businesses to smaller businesses for selling further is
captured by the WPI.
In India, both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are used to measure inflation.
Main causes of Inflation

High demand and low production or supply of multiple commodities create a demand-supply gap, which
leads to a hike in prices.
Excess circulation of money leads to inflation as money loses its purchasing power.
With people having more money, they also tend to spend more, which causes increased demand.

Important Committees related to Banking and Finance in India
Name of The Committee and their Focus Area
1. A C Shah Committee For Reforms Relating To Non-Banking Financial Companies (NBFC)
2. A Ghosh Committee Frauds & Malpractices In India
3. A K Khandelwal Committee Hr Issues Of Public Sector Banks
4. Abid Hussain Committee For Small Scale Industries
For Development of Capital Market
5. Aditya Puri Committee For Dissemination Of Credit Information
6. Ajay Shankar Committee To Review The Functioning Of PPP Cell
7. Ak Bhuchar Committee Coordination Between Term Lending Institutions And Commercial Banks
8. Amitabh Chaudhry Committee Analysis The Existing Framework Of IRDA-Linked And Non-Linked Insurance
Product Regulations
9. Arvind Mayaram Committee For Giving Clear Definitions To Foreign Direct Investment (FDI) And Foreign
Institutional Investment (FII)
10. Basel Committee For Banking Supervision
11. Bhandari Committee For Reconstruction Of RRBs
12. Bhide Committee Coordination Between Commercial Banks And SFC’s
13. Bimal Jalan Panel To Scrutinize Applications For New Bank Licenses
14. B. D. Shah Committee Stock Lending Scheme
15. B Sambamurthy Committee For Mobile Banking
16. B Siaraman Committee Institutional Credit for Agricultural and Rural Development
17. C Rangarajan Committee For Poverty Scale Estimates In The Country For Mechanisation in the Banking
Industry (1984)

18. Chelliah Committee (1991) For Tax Reforms
19. Chesi Committee For Direct Taxes
20. Cook Committee For Capital Adequacy Of Banks
21.Damle Committee (1982) Introducing MICR/OCR Technology for Cheque Processing
22. Damodaran Committee For Improvement Of Customer Services In Banks
23. Dave Committee (2000) For Pension Scheme For Unorganized Sector
24. Deepak Mohanty Committee Data And Information Management In The Rbi
25. Deepak Parekh Committee For Financing Infrastructure Sector
26. Dinesh Sharma Committee To Propose New Regulation Related To Digital Currencies Or Virtual Currencies
27. D. K. Mittal Committee To Improve Financial Condition Of Railways
28. D. R. Gadgil Committee Agricultural Finance
29. Gadgil Committee (1969) Lead Banking System
30. Godwala Committee Rural Finance
31. Hathi Committee For Soiled Bank Notes
32. H R Khan Committee To Evaluate Unclaimed PPP And Post Office Saving
33. I.T. Vaz Committee Working Capital Finance In Banks
34. Inter- Departmental Tax Force To Monitor And Review The Functioning Of Shell Companies To Prevent
Their Misuse For Money Laundering And Tax Evasion
35. J Reddy Committee Reforms in Insurance Sector
36. James Raj Committee Functioning Of Public Sector Banks
37. Janakiraman Committee To Investigate The Security Transactions Of The Bank
38. Justice M B Shah Commission On Black Money
39. Karve Committee For Small Scale Industry
40. K M Chandrasekhar Committee For Rationalization Of Foreign Investment Norms
41. K Madhav Das Committee Urban Cooperative Banks

42. K S Shere Committee (1995) For proposing Legislation On Electronic Funds Transfer (EFT) and other
Electronic Payments
43. K.U.B. Rao Committee For Setting Up Bullion Bank Or Bullion Corporation Of India
44. K.V.Kamath Panel
To Examine The Financial Architecture For Micro, Small And Medium Enterprises
45. Kelkar Committee For Tax Structure Reforms
46. Khandelwal Committee On HR Issues Of Public Sector Banks
47. Khusrau Committee Agricultural Credit
48. Lakdawala Committee Poverty
49. L K Jha Committee For Indirect Taxation Enquiry
50. Marathe Committee Licensing of New Banks.

Economics

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Economics

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wFor Classes I Mock Test I Books Call on:- 8828581455/54 www.manoeuvreedu.

It studies how individuals, businesses,

Economics focuses on the actions of human

The building blocks of economics are the studies

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"Production under socialism would be directly and solely for use.

Classification of Indian Economy

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➢ Sector share towards GDP - 17.32%

➢ Sector share towards GDP - 27.48%

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➢ Sector share towards GDP - 54.77%

individuals and firms.

2. Macroeconomics - is a branch of economics dealing with the performance, structure, behavior,

Demand Curve- It is a graphical representation of demand schedule.

Individual Demand- Demand by an individual consumer.

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2. Income of the consumer

3. Price of related goods

4. Taste and Preference

5. Expectations of future price change

Demand Function: Dx = f( Px, Y, Pr, T)

Changes in Demand- They are of two types -

2) Change in Demand (Shifts in demand)

1) Expansion of demand: More demand at a lower price

2) Contraction of demand: Less demand at a higher price

Causes of Increase in Demand

2. Increase/ favorable change in taste and preference.

3. Rise in price of substitute good.

4. Fall in price of complementary good.

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Causes of Decrease in Demand:

2. Unfavorable/Decrease in taste and preference

3. Decrease in price of substitute good.

4. Rise in price of complementary good.

Note: Decrease in income causes Decrease in demand for normal good.

5. Normal goods - the quantity demanded of such commodities increases as the

goods are called normal goods.

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The complementary goods and substitutes are called related goods.

Demand for substituting goods is directly related to prices.

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1. Perfectly Inelastic Demand (e = 0)

2. Inelastic (less elastic) demand (e < 1)

3.Unitary elasticity demand (e = 1)

4. Elastic (more elastic) demand (e > 1)

It means a small change in price induces a significant change in, demand.

5. Perfectly elastic demand (e = ∞)

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Measures of cross-elasticity of demand -

Infinity - Commodity x is nearly a perfect substitute for commodity y

Zero - Commodities x and y are not related.

Negative - Commodities x and y are complementary

*Elasticity of supply = Proportionate change in quantity supplied/Proportionate change in price.

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Features of perfect competition:

3. Free entry and exit of firms.

5. Firm is a price taker and industry is price maker.

6. Perfectly elastic demand curve (AR=MR)

7. Perfect mobility of factors of production.

8. Absence of transportation cost.

9. Absence of selling cost.

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